Insights and opinions from an internationally recognized authority on investment performance measurement

Thursday, July 8, 2010

Much ado about nothing?

A colleague, when seeing my commentary on the GIPS(R) (Global Investment Performance Standards) use of the aggregate method to derive composite returns, stated "I don't think this is an issue we should worry about

." Suffice it to say, I disagree.

Why did the standards introduce a requirement this past January to require firms to at least revalue for large cash flows? To provide more accurate results. That's it. And so, many firms have had to "beef up" their calculation process in order to comply. Great!

But then, many of these firms employ the aggregate method to derive their composite results, which are going to take these highly accurate portfolio returns and turn them into less-than accurate composite returns! Does this make any sense? And, for the standards to require managers who use the aggregate method to revalue when these flows are the result of new accounts added within the period will generate even less accurate results.

My colleague also suggested "Basically accounts should not enter mid-period - and if we don't say that anywhere perhaps we should." Funny: suggesting that we disallow the entry of new accounts mid-month but to not support stopping the use of a composite return method which is clearly flawed!

Perhaps I am alone in this subject as we've permitted the aggregate method for 17+ years. But, if we stopped allowing it, would there be a problem? We stopped permitting the Original Dietz method, which was once permitted. If we're striving for accuracy, why would we permit an admittedly flawed method to continue to be used? Am I tilting at windmills?

Spaulding, David Spaulding

About David Spaulding

is an internationally recognized authority on investment performance measurement. He's the founder and Chief Executive Officer of The Spaulding Group, Inc. (www.SpauldingGrp.com), and founder and publisher of The Journal of Performance Measurement. He's the author, contributing author, and co-editor of several investment books. He's actively involved in the investment performance industry, serving on numerous committees and working groups.
Dave earned his BA in Mathematics from Temple University, his MS in Systems Management from the University of Southern California, an MBA in Finance from the University of Baltimore, and a doctorate in Finance and International Economics from Pace University.
For more information please visit www.spauldinggrp.com/the-company/david-spaulding.html

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